Quote:
This bubble will burst, I remember the Hunt bro.
Please forgive us that remember the old days.
Like me, you may have lived through the Hunt run-up and crash, but almost no one is aware of what happened. Here's the real story.
The Hunts wanted to compile a lot of silver. They did this by buying contracts on the commodity exchange.
Normally, a contract is created when a miner wants to have a steady, known income. If the mine produces 50,000 ounces of silver a month, it promises to sell 10 contracts at today's price, plus interest + storage cost, with delivery in Sept.
A jewelry maker will need 50,000 oz of silver in Sept, but wants to lock in today's price without tying up all that money, so he buys 10 contracts, paying today's price plus I+S (which he'd have to pay if he bought the silver outright), putting 5% down to seal the deal, the rest due on delivery. Miner has a guaranteed sale, jeweler has a guaranteed supply, everyone's happy.
If the miner wants to sell contracts but there are no buyers, a speculator buys them. He hopes silver goes up a dollar before he sells, and he'll make $5000 per contract, which he only had to put up $1000 to control. Silver goes up 20%, he makes 500%.
Normally, there are a group of miners and a group of users needing roughly the same amount of silver. In the meanwhile, there are a
bunch of speculators buying and selling contracts.
Come sept, the speculators sell their contracts to the users (with luck, at a profit). As long as mining and use are roughly equal, everything is fine.
Instead, the Hunts didn't sell their contracts giving them the rights to buy silver at a fixed price. They said "here's the rest of the money, give us the silver we contracted to buy."
Problem is, miner has 50,000 oz, user wants 50,000 oz, but so do the Hunts, and they have contracts guaranteeing delivery. Now the sellers of those contracts (other speculators expecting silver to go down) have to come up with 50,000 oz of silver!
They can't mine much faster, so they offer a higher price for scrap sterling, coins, etc, until they have enough.
If this was a one-shot deal, it would have ended there, but the Hunts had more contracts coming due in oct, nov, dec, etc, and they insisted on getting physical delivery of silver for them, meaning prices kept rising to shake loose more silver from the public.
Eventually, other speculators realize that they can buy a contract for $1000, and make $5000 every time silver goes up $1. It gets to the point where people would mortgage a paid-off house to buy bunches of contracts, since it looked like easy money. The saw cuts both ways, tho. If silver drops $1, you lose $5000--the $1000 you paid and $4000 more, since you sell the contract at a loss. And now you have a mortgage payment to boot!
The powers that be then made two changes that most people never heard about. Instead of putting 5% down, they required 2/3. So the guy who mortgaged his house to buy 100 contracts at $1000, can only buy one contract for $100,000 down, $50,000 on delivery. Instead of making $500,000 if silver goes up $1, he'll only make $5000. The good news is he'll only lose $5000 if it goes down $1.
This didn't change much for the Hunts. They simply paid the same price, but most of it up front and less on delivery.
Then the killer.
They limited the amount of silver anyone could buy in one month.
Let's say you win a huge lottery and go to the local computer dealer, who sells five a month. You contract to buy 100 a month, and he places a standing order for them.
You buy the 100 every month, until they pass a law saying no one can buy more than five. You have agreements to buy 95 machines he can't sell to you. The only thing you can do is sell the right to buy those 95 machines to other people, and you will only be able to do that if you sell them for a LOT less money than you agreed to pay.
That, my friend, is what finally crashed the silver price. The Hunts had agreements to buy silver that they had to sell for whatever they could get. The more silver dropped, the more speculators waited for it to drop more, and with their holdings falling 50% overnight, their backers wouldn't lend them more money, or asked to be repaid.
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Posted 02/25/2011 12:00 pm
